Sell in May and Go Away?

We are almost done with the month of May, but we are sure you have heard the following Wall Street saying no less than a hundred times…

“Sell in May and go away.”

It is a prevalent view and also happens to rhyme, so writers like to use it!

Is it true?

Historically, there is some decent data to back up this view.

In the last 80 years, the S&P 500 has gone up on average +6.9% in the six months starting in November (to April). It has also been up 76% of the time or slightly better than the average for any given six months.

However, the six months from May 1 to the end of October has shown an average return of only +1.7% or far less than the previous period. The success rate of 66% is also slightly lower.

From the data, it is true that, on "average," this is a period where stocks as a whole underperform.

Why does this happen?

We have written about the concept of "seasonality" several times in the past. This idea is that particular times of year can affect stock market performance.

Our view is that there ARE material seasonal patterns for the market. Like technical analysis, though, only a few powerful ones really count.

The most powerful of those is stock market strength into year-end.

Although there is no real logical reason, many professional money managers are still paid on their calendar year returns. This means their performance for the entire year ended December 31 plays a significant role in their compensation.

If you take a step back, the structure doesn't make any sense but is well-established.

This means many managers are highly motivated to push the market higher into year-end. Combined with the holidays at year-end, there is a pronounced and statistically significant bias for stocks to move higher in the last few months of the year.

Much more complicated – but also significant – is the fact that the stock market often does very poorly in September and October.

Here is a table showing stock market returns by month…

From the table, statistically, it is really about September, but there have also been some nasty Octobers. October has been the month where the stock market has bottomed the most.

Why these months in particular?

Our theory is that companies can no longer delay bringing down their expectations for the entire year once they get to this time of year. They have run out of time and any "tricks" they might have had to try to hit the numbers.

Combine it with everyone returning from vacation, and you have a volatile period.

It is interesting to note that May also tends to be a down month. That could be another reason folks like to use the saying.

How is this holding up in 2024?

Not so well. The stock market is having a great May. The S&P 500 is 5%, and the NASDAQ Composite is +8% so far…

This gets to our overall view on the saying “sell in May and go away” and our title above – IT DEPENDS.

In the case of this May, we entered into a stock market correction at the end of March after a ripping rally for six months straight. We called it out then (see our note here), but the market was due for a break.

It took that break in April but found a bottom after just a few weeks. This is because we are still in a strong BULL MARKET trend, and the economic environment is relatively stable.

In this case, the timing of the May stock market performance had everything about what was happening the months before. Perhaps that long rally that ended in March could have persisted another three weeks, and we would be looking at a nasty May.

The context of what is happening in the stock market matters the most in terms of the monthly performance.

What about the statistical evidence that we cited at the start?

We think that data has more to do with the powerful seasonal factors that power year-end and the start of a new year. It is less about "selling in May" and more about "buying in November."

We also think that the summer months see declining volume and market participation. This can increase stock market volatility, creating a more significant variability of returns.

We believe investors should ignore the idea of "sell in May".

Look at where the stock market is going into the month and the summer, and make your own decisions based on the current situation., not the 95-year "average" data.

Most importantly, we think investors should have a TRADING or INVESTING process that doesn't care. One that should be able to deal with the stock market volatility and still accomplish your goals!